Centrica has been tipped to pay its shareholders the most out of all the income stocks in the FTSE 100 in the new year, according to an online stockbroker.

The Berkshire-based utilities company is forecast to dish out eight per cent in dividends payments - 0.3 percentage points more than Direct Line in second place and 0.4 higher than Taylor Wimpey in third, according to research by AJ Bell.

The top 10 dividend payers on their own are forecast to represent 55 per cent of the total shareholder pay outs in 2018 according to AJ Bell research

In all, FTSE 100 dividend stocks are predicted to distribute £88.5billion to shareholders in 2018 - a 7 per cent increase on 2017.

Dividend hunters should note that the bulk of the FTSE 100 dividends payments come from a relatively small proportion of the index.

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Russ Mould, investment director at AJ Bell claims that financial services firms (23 per cent), oil and gas explorers (20 per cent) and miners (8 per cent) will provide the largest source of dividend income next year - accounting for 51 per cent of the index’s total dividend payments.

Royal Dutch Shell, Hargreaves Lansdown and BP are among the ten companies forecast to have the highest dividend yields.

Ten FTSE 100 shares forecasted to have the highest dividend yield in 2018

Company

Dividend cover 2018

Dividend yield 2018 (%)

St. James's Place

1.05x

4.0

Royal Dutch Shell

1.07x

6.0

Direct Line

1.12x

7.7

British Land

1.19x

4.8

Hargreaves Lansdown

1.22x

2.5

Hammerson

1.22x

5.0

Centrica

1.24x

8.0

Admiral Group

1.03x

5.9

HSBC

1.00x

5.4

BP

0.99x

6.1

Vodafone

0.70x

6.0

Source: AJ Bell Dividend Dashboard

Scaling income

For those looking to invest in shares for income over the long term, it is paramount to select stocks that not only offer handsome dividend payments, but also have a good track record of growing these payments over time.

Dividend cover is a useful metric to get an idea of a company's ability to grow its dividend payments in the future.

It is the ratio of a company's net income over dividends paid to shareholders. So, for example, the cover for a company making a £100 profit and distributing £50 in dividends is two.

Source: AJ Bell

When dividends exceed profits, the ratio is below one, so anything above that figure suggests dividends are more sustainable and affordable for companies to pay out.

So while, for example, BT ranks seventh on the top ten list, it boasts the highest dividend cover ratio of 1.73 times and therefore has the potential to climb up the list a couple of years down the line.

In fact, the ten companies with the lowest dividend cover in the FTSE 100 features three of the prospective highest dividend yields Centrica, Direct Line and BP and all but two of them (Hargreaves Lansdown and St James’s Place) are predicted to yield significantly more than the FTSE 100 average.

Ten FTSE 100 shares forecasted to have the lowest dividend cover in 2018

Company

Dividend yield 2018 (%)

Dividend cover 2018

Centrica

8.0

1.24x

Direct Line

7.7

1.12x

Taylor Wimpey

7.6

1.41x

SSE

7.2

1.26x

Barratt Developments

7.1

1.49x

Lloyds

6.8

1.62x

BT

6.2

1.73x

GlaxoSmithKline

6.2

1.35x

Legal and General

6.2

1.52x

BP

6.1

0.99x

Source: AJ Bell Dividend Dashboard

Mould said: 'The issue of skinny dividend cover refuses to go away. Earnings cover for dividends remains much thinner than ideal at 1.63 for 2018 and there has been little real improvement here in 2017.

'Ideally earnings cover needs to be around the two level to offer a margin of safety to dividend payments, should there be a sudden and unexpected downturn in trading at a specific company, or indeed the UK and global economies as a whole.

'Pearson and Provident Financial are both examples of what can happen in the event of a profits stumble under such circumstances, as both had been offering apparently juicy yields but with skinny earnings cover. Indeed, some of the companies with the juiciest-looking dividend yields have dividend cover that looks particularly malnourished at 1.37.'

Dividend cover for the FTSE 100 firms is forecast to hit 1.63 next year - which is lower than it was at the height of the financial crisis a decade ago, according the research.

So it might be worth looking beyond the FTSE 100 to listed small and medium-sized listed companies which tend to have stronger dividend cover.

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